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Risk Management Case Study: Part Two

This Business of Farming

Building better landlord relationships pays dividends

Published on: July 9, 2013

This week we've heard great sessions on business relationships, risk management and hiring strategies at the Purdue Top Farmer Crop Workshop. Ag economist Mike Boehlje walked through a series of questions relating to business and family relationships and how much risk is generated from those relationships. Levi Huffman, general manager at Huffman and Hawbaker Farms, was gracious enough to offer himself as a human guinea pig through a case study discussion. The 50 farmers in attendance set up at different tables and talked through different ways to improve business and landlord relationships.

The underlying theme of that discussion is what may happen this fall and winter if prices drop and cash rents stay high. We could see some rough financial waters; your relationships with landlords may become very, very important.

Manage landlord transitions Modern cash grain farms find themselves working with five, ten, even 20 landlords at a time. At some point ownership of a parcel you rent will shift to an heir, or be sold and managed by a farm management outfit that may not be as benevolent as the previous owner. It's prudent for you to form bonds with the younger generation in the landlord's family. That's why you hold open houses or annual farm-based events and go the extra mile to show your appreciation.

If you're already paying fair and competitive rent and don't have a written agreement, that owner transition is the time to put one in place. "That's one reason to get some formal agreement in place, so that when that change happens, at least you have a starting point to begin a new relationship with the next generation," says one farmer. "It's a continuity thing, and it doesn't have to be complicated."

On the other hand, if you've been paying the same rental rates for the past 20 years, your risk of losing that land in an owner transition is exponentially higher. Heirs don't want to feel like you've been taking advantage of their parents all these years.

Huffman adjusts cash rent voluntarily, and rarely have any of his 17 landlords approached him to seek increases. He bases rents on what he believes is reasonable market conditions and generally pays above average rates; in addition, he pays landlords informal bonuses when yields come out better than expected.

Prepare to negotiate What happens if we see consecutive years of falling grain prices? Some landlords may sympathize and have no problem lowering rents, at least to some degree. Others may need more persuading. You need to prepare a negotiating strategy. That starts with doing some homework to show input and other crop costs and projected profit margins. Get it all in writing and be ready to make a case for an adjusted rent that both sides can live with.

"If I can show landlords on paper what our costs are and what we need to make our operation go, most will understand it," one farmer told me. "Those who don't are probably struggling to pay their bills and we'd have to negotiate with them."

The farmer, who asked not to be identified, told me he and his brother break data down by farm to show yield and profit per acre along with input costs. "If you can take that info at the end of the year and show how we arrive at a number for fair rent, they really appreciate it," he says. "They can see that it's an honest number. It's a lot of work putting that together but it's worth it."

His biggest threat are farm management firms that only focus on shopping land to the highest bidder, regardless of management skill, fertility or conservation commitments.

Kitchen table relationships "A lot of this goes back to kitchen table relationships – eye to eye conversations whenever possible," said another farmer. When he can't have face to face visits he finds other ways to communicate, including a website, to be more transparent about the business.

"We publish why we do what we do, the hybrids and chemicals and biotech corn – anything and everything that we see in the media that may be troubling to our landlords," he says. "It's a lot of work, but a lot of people are really positive about this."

Huffman and Hawbaker Farms also have a website, notes Levi Huffman. "It's a lot of work to maintain, but it's going to pay dividends," he says. You can skip the cost of a web designer by just setting up a Facebook page and share your business story that way. Sign start a free account at Facebook.com.

Out of the 50 or so farmers in the room, very few raised hands when asked if they had formal meetings with landlords. Annual family outings at your farm builds good will and trust. Such get-togethers are ways to extend hospitality, connect family members, and build that relationship.

Tall grass threats If the ag boom fades and incomes begin to soften, don't think your competitors won't be looking to capitalize on neighborhood financial stress – including yours.

"Your vulnerability may be greatest when incomes are weaker – you fool yourself into thinking no one would pay more for land when incomes are down," says Boehlje. "But there may be someone lurking in the tall grass who is willing and able to push a bid out to one of your key landlords."